Expulsions: Brutality and Complexity in the Global Economy

(Harvard University Press)US: May 2014

The ways in which economic growth takes place matter. A given growth rate can describe a variety of economies, from one with little inequality and a thriving middle class to one with extreme inequality and concentration of most of the growth in a small upper tier. These differences exist across and within countries. Germany and Angola had the same rate of GDP growth in 2000 but clearly had very different economies and saw very different distributive effects. Although Germany is reducing the level, it still puts a good share of government resources into countrywide infrastructure and offers a wide array of services to its people, from health care to trains and buses. Angola’s government does neither, choosing to support a small elite seeking to satisfy its own desires, including luxury developments in its capital city, Luanda, now ranked as the most expensive city in the world. These differences can also be seen in a single country across time, such as the United States just within the past fifty years. In the decades after World War II, growth was widely distributed and generated a strong middle class, while the decade beginning in 2000 saw the beginnings of an impoverished middle class, with 80 percent of the growth in income going to the top 1 percent of earners.

In the post–World War II era, the critical components of Western market economies were fixed-capital intensity, standardized production, and the building of new housing in cities, suburbs, and new towns. Such patterns were evident in a variety of countries in North and South America, Europe, Africa, and Asia, most prominently Japan and Asia’s so-called Tiger economies. These forms of economic growth contributed to the vast expansion of a middle class. They did not eliminate inequality, discrimination, or racism. But they reduced systemic tendencies toward extreme inequality by constituting an economic regime centered on mass production and mass consumption, with strong labor unions at least in some sectors, and diverse government supports. Further deterrents to inequality were the cultural forms accompanying these processes, particularly through their shaping of the structures of everyday life. For instance, the culture of the large suburban middle class evident in the United States and Japan contributed to mass consumption and thus to standardization in production, which in turn facilitated unionization in manufacturing and distribution.

Manufacturing, in tandem with state policies, played a particularly strong role in this conjunction of trends. As the leading sector in market-based economies for much of the twentieth century, mass manufacturing created the economic conditions for the expansion of the middle class because (1) it facilitated worker organizing, with unionization the most familiar format; (2) it was based in good part on household consumption, and hence wage levels mattered in that they created an effective demand in economies that were for the most part fairly closed; and (3) the relatively high wage levels and social benefits typical of the leading manufacturing sectors became a model for broader sectors of the economy, even those not unionized nor in manufacturing. Manufacturing played this role in non-Western-style industrial economies as well, notably in Taiwan and South Korea, and, in its own way, in parts of the Soviet Union. It has also played a significant part in the growth of a middle class in China since the 1990s, though not as consequential a role as it did in the West in the twentieth century.

By the 1990s, these economic histories and geographies had been partly destroyed. The end of the Cold War launched one of the most brutal economic phases of the modern era. It led to a radical reshuffling of capitalism. The effect was to open global ground for new or sharply expanded modes of profit extraction even in unlikely domains, such as subprime mortgages on modest residences, or through unlikely instruments, such as credit default swaps, which were a key component of the shadow banking system. Thus I see China’s rapid manufacturing growth as part of this new phase of global capitalism that takes off in the 1980s; this also helps explain why that growth did not lead to the vast expansion of a prosperous working and middle class in China. Such a difference also marks manufacturing growth in other countries that have become part of the outsourcing map of the West.

Two logics run through this reshuffling. One is systemic and gets wired into most countries’ economic and (de)regulatory policies—of which the most important are privatization and the lifting of tariffs on imports. In capitalist economies we can see this in the unsettling and de-bordering of existing fiscal and monetary arrangements, albeit with variable degrees of intensity in different countries.

The second logic is the transformation of growing areas of the world into extreme zones for these new or sharply expanded modes of profit extraction. The most familiar are global cities and the spaces for outsourced work. Each is a type of thick local setting that contains the diverse conditions global firms need, though each does so at very different stages of the global economic process, for instance, computers for high-finance versus manufacturing components for those computers. Other such local settings in today’s global economy are plantations and places for resource extraction, both producing mostly for export. The global city is a space for producing some of the most advanced inputs global firms need. In contrast, outsourcing is about spaces for routinized production of components, mass call centers, standardized clerical work, and more, all of it massive and standardized. Both these types of spaces are among the most strategic factors in the making of today’s global economy, besides intermediate sectors such as transport. They concentrate the diverse labor markets, particular infrastructures, and built environments critical to the global economy. And they are the sites that make visible, and have benefited from, the multiple deregulations and guarantees of contract developed and implemented by governments across the world and by major international bodies—in both cases, work mostly paid for by the taxpayers in much of the world.

Inequality in the profit-making capacities of different sectors of the economy and in the earning capacities of different types of workers has long been a feature of advanced market economies. But the orders of magnitude today across much of the developed world distinguish current developments from those of the postwar decades. The United States is probably among the most extreme cases, so it makes the pattern brutally clear.

The decade of the 2000s helps illuminate this relentless rise in corporate profits and reduction of corporate taxes as a share of federal tax revenues. The crisis late in the decade brought a sharp but momentary dip in corporate profits, but overall these kept growing. The extent of inequality and the systems in which inequality is embedded and through which these outcomes are produced have generated massive distortions in the operations of diverse markets, from investment to housing and labor. For instance, using Internal Revenue Service data on corporate tax returns, David Cay Johnston finds that in 2010 the 2,772 companies that own 81 percent of all business assets in the United States, with an average of $23 billion in assets per firm, paid an average of 16.7 percent of their profits in taxes (down from 21.1 percent in 2009), even though their combined profits rose 45.2 percent, a new record. Profits growing three times faster than taxes means their effective tax rates fell. The effects are visible in the composition of federal tax revenues: a growing share of individual taxes and a declining share of corporate taxes. The share of individual taxes is estimated to rise from 41.5 percent of federal revenues in fiscal 2010 to 49.8 percent in fiscal 2018. In contrast, corporate income taxes—assuming current rates—are expected to grow by only 2.4 percentage points over the same period, from 8.9 percent of federal revenues in 2010 to 11.3 percent in 2018.

The trajectory of governments in this same period is one of growing indebtedness. Today, most of the developed-country governments could not engage in the large-scale infrastructure projects common in the postwar decades. Using International Monetary Fund (IMF) data, the Organisation for Economic Co-operation and Development (OECD) finds widespread growth of central government debt as a percentage of GDP. Table 1.1 presents numbers for several, mostly developed countries. The trend holds for very different types of governments: Germany saw its central government debt increase from 13 percent of GDP in 1980 to 44 percent in 2010; U.S. government debt increased from 25.7 percent of GDP in 1980 to 61 percent in 2010; and China’s rose from 1 percent of GDP in 1984 to 33.5 percent in 2010.

The rise of government deficits has also been fed by the increase in tax evasion, partly facilitated by the development of complex accounting, financial, and legal instruments. In a 2012 research project for the Tax Justice Network, accountant Richard Murphy estimates tax evasion globally at $3 trillion in 2010, which represents 5 percent of the global economy and 18 percent of global tax collections in 2010.10 The study covered 145 countries with $61.7 trillion of gross product, or 98.2 percent of the world total. The estimated tax evasion is based on a juxtaposition of World Bank data on the estimated size of shadow economies with a Heritage Foundation analysis of average tax burdens by country.

Murphy finds that a key reason for this tax evasion is the combination of weak rules on accounting and disclosure combined with inadequate budgets to enforce tax laws. The United States has the largest amount of absolute tax evasion, clearly a function partly of the size of its economy. Murphy estimates U.S. tax evasion at $337.3 billion, which is 10.7 percent of global evasion; this is not too different from the official U.S. Internal Revenue Service tax gap estimates. Given the measures used in the report, it excludes “lawful” tax evasion, which we know has increased sharply over the last decade thanks to extremely creative accounting, including the use of private contractual arrangements that can bypass state regulations lawfully, so to speak.